I TURNED AGE 62 LAST summer and, as with most birthdays at this stage of life, I had a pretty good, but non-spectacular day. On my birthdays, I tend to focus on enjoying the day itself as it stands before me and, for that one day, I don’t worry too much about the future, or all the adult stuff I have to do, or problems I might have to solve tomorrow, or the problems I think up in my head that would probably go away if I just stopped thinking about them.
Not fussing about such things generally leads to having a good day. Come to think of it, I should probably have birthdays more often.
In the U.S., however, age 62 marks a unique point in personal finance. For most folks, it’s the earliest age for taking Social Security. From this point on, you’re actively choosing whether to take benefits early or opting to wait.
As most people old enough to claim Social Security know, the longer you wait to claim, up to age 70, the larger the monthly checks you get once you do claim. But of course, while you wait, you get no checks. You have to make a decision whether the more numerous small checks you’d get from claiming early would be better than the fewer but larger checks you’d get by claiming later.
The most common method to figure out the optimal claiming age involves comparing the streams of income from claiming early with those from claiming late. At some “crossover” point, the larger checks from claiming late surpass the value of benefits from claiming early. The exact crossover point varies depending on the assumptions in the analysis, but typically it occurs when claimants are in their late 70s or early 80s.
Getting grumpy. Problem is, nobody knows what future market returns will be, or the exact discount rate that accurately tells you the present value of future money, or future tax rates, all of which are important variables in figuring out a crossover or breakeven point. These future uncertainties have to be estimated. Once you’ve made your estimates, some fairly simple math tells you whether, if you die at any given age, you’d get more Social Security money by claiming early or claiming later. Then, if you have perfect foreknowledge of the exact date of your death, you can make a logical claiming decision.
In the most thoughtful analyses, these estimations have well-considered assumptions behind them, but there’s still uncertainty. Still, at some point, these uncertain projections turn into hard numbers. For most of us, numbers look exact and real, orderly and comforting. They become a mental optical illusion that allows us to forget that uncertainty doesn’t disappear when it’s turned into numbers.
The problem here is not the thoughtful analyses or the people who construct them. The analyses provide useful frameworks for thinking about one of the hardest things humans have to do: make rational decisions about the best course of action when faced with an uncertain future.
Nevertheless, I find making this kind of decision annoying—because I’d like to make the best decision possible, but knowing I’m making the best decision is impossible because the perfect decision rests on a series of future variables that are impossible to quantify with precision. The fact that many decisions in life are like this isn’t helpful. It’s as if the world wants me to be grumpy.
What’s a grumpy person to do? I reframe the decision by considering two basic questions. First, what is Social Security? Second, what can I reasonably hope it’ll do for me?
First, Social Security is an insurance program that, among other things, supplies retirement benefits in the form of a lifetime stream of income. The key word here is insurance, because insurance is a different animal from investing. When you invest money, you accept risk in the hope that the future return on your money will reward that risk. When you buy insurance, you pay money to avoid risk of financial hardship that a future event might bring you. Social Security is insurance that mitigates the risk of being entirely without income, because you depleted your savings, by delivering a stream of inflation-indexed income that you can’t outlive.
To me, one of the drawbacks of crossover analyses is they treat the income stream from Social Security not as insurance, but as an investment opportunity—a chance to use that income stream to maximize investment returns. That’s a perfectly rational way to look at most streams of income, but it ignores the value of risk mitigation that’s the central benefit of insurance. It frames the insurance offered by Social Security not as a way of decreasing risk, but as a means of accepting more investment risk.
Going for the good deal. The second question—what can I hope Social Security will do for me—is more personal. As an insurance program, Social Security was not designed to cover 100% of your retirement expenses, and for most people, including me, it won’t.
I decided to think of Social Security as a stream of income that would help cover my basic living expenses. In effect, the asset of relatively reliable Social Security payments could be matched against the ongoing liabilities stemming from my basic expenses—stuff I can’t avoid paying for as long as I’m alive.
I have a better handle on my basic expenses than I have on future market returns or how long I’m going to live. Both my basic expenses and my future Social Security income will likely increase with inflation. Social Security’s inflation adjustment almost certainly won’t exactly match the inflation in my basic expenses, but they should move in parallel and the relationship between the two won’t be derailed by market volatility, a favorable trait of Social Security not shared by many other projected income streams.
Retirement expenses obviously vary from person to person. My key point: Consider what portion of your “must have” expenses Social Security might cover at different claiming dates. I define my basic expenses as food, clothing, household supplies, minor house maintenance, health insurance premiums, car insurance, property insurance, utilities and gas for the car. I have no mortgage or other debt.
For a moment, forget about your investment accounts. Instead, think about the streams of income you have, on top of what you might get from Social Security. Some people have pensions and deferred compensation plans. Some have rental property or royalties or annuities. Some work part-time or have spouses who continue to work. I decided to think about how long I would have to wait to claim Social Security so that my benefit—in combination with my other streams of income—would cover my basic living expenses.
Because the income and health situations for people in early retirement vary from person to person, the relative value of Social Security’s insurance component also varies. At one extreme, if you have health issues and little or no other income, the insurance benefit of an immediate steady stream of guaranteed income to safely cover current expenses could be critical. Delaying Social Security to get higher future payments does you little good if you can’t pay your next health insurance premium or electric bill.
At the other extreme, if you’re doing work you enjoy, or you have some mix of steady income that exceeds your living expenses, or you have so much money in the bank that you have no problem covering your expenses, the insurance value of early Social Security payments is negligible. A higher guaranteed monthly payment in the future will be more valuable to you, particularly after you stop working and your current earned income no longer covers your basic expenses.
My situation, fortunately, is closer to the second extreme. I have two streams of income: a small rental income and my freelance work. At the moment, those two income streams almost fully cover my basic expenses. While the part-time freelance work is enjoyable to me and pays some bills now, a plan that involves “I will work forever” is not entirely realistic. The rental income, on the other hand, might last my lifetime.
I calculate that my annual Social Security benefit will be large enough that, in combination with my rental income, it’ll cover my basic expenses and a little bit more once I reach my full Social Security retirement age. Obviously, as that date gets closer, I’ll continue to monitor that projection. But at some point, when these relatively secure streams of income cover basic expenses, I’ll be inclined to claim benefits.
With Social Security to cover my basic expenses, my financial market investments will only be burdened with having to pay for “lumpy” expenses, such as another car at some point, health care issues, perhaps travel or other forms of “fun,” fixing the roof on my house someday, gifting and so forth. In my case, that remaining burden is small enough in relation to my portfolio that the risk I’ll outspend my resources is virtually eliminated, and the probability I’ll be able both to afford extra things I want and to help other people is greatly enhanced.
If that’s what Social Security, as a form of insurance, can do for me, it sounds like a pretty good deal. I accept that I can’t know with certainty which claiming decision results in the absolutely optimal outcome. But if I get a pretty good deal that minimizes financial risk, I’ll take it.
David Johnson retired in 2021 from editing hunting and fishing magazines. He spends his time reading, cooking, gardening, fishing, freelancing and hanging out with his family in Oregon. Check out David’s earlier articles.
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Perhaps it would be helpful to reframe your choice as making the “best possible decision” versus the “best decision”. For all the reasons you mention and probably more, the best decision is unknowable.
But making a decision based on what is possible to know, what you can and do know, is the definition of making the “best possible” decision. I think based on your excellent post that you are making the best possible decision.
I waited until age 70 to claim my own social security benefit based on my earnings. The factor that influenced my decision the most were the spousal benefit provisions. If I should die before my wife, as my wife is about four years younger than me and I was the higher earning spouse and she had more than a decade of no or low earnings in the years she spent with raising our children, she will step into a social security benefit based on my higher benefit including deferred credits for delaying my SS claiming. I also worked until I was age 72 after claiming at age 70. In my later years of working reduced hours after I claimed social security I was able to make higher and significant contributions to my 401k and both of our individual retirement accounts and I was lightly taxed on my wages as almost all were going into tax deferred retirement accounts. I do not have a pension, just our retirement funds and some treasury I-bonds where the interest income is deferred until I redeemed them.
The decision to delay claiming for me was emotionally more difficult than the financial decision during the period from my FRA to age 70. I like the past comments I have read on Humble Dollar that very few of us will die at at any particular average date and that you do not want to run out of money before you run out of breath. I guess I fall in the camp that views my social security claiming decision as financial insurance in the event of a long life.
I am fortunate to have been able to work as long as I did and did not financially have to claim my social security benefit earlier than I did. I think many of us find less satisfaction later in our careers but I did not hate my work and by working longer I was able to add to our nest egg. In my last years of work I was mostly able to subtract the parts of my work that I disliked and also tried to keep the the parts of my job that supported my identity and purpose by taking a pay cut and working less hours. When family medical issues recently arose I was financially ready for my next chapter to start.
Can anyone link a website(s) that calculates the optimal claiming age, comparing income streams from claiming early to income streams from claiming late? I would like to estimate my crossover point. Thanks!
Have you tried Mike Piper’s site?
https://opensocialsecurity.com/
Thanks for this. I always wonder why people worry about the “break even” or crossover point. If you delay your SS start and then die before reaching the magic age, you won’t know and so you won’t care. I look on SS as an annuity with a real COLA, which is virtually unobtainable elsewhere. Since my pension, which was frozen in 2000, has no COLA, that is a critical element for me and I delayed until 70 so that I got the largest possible base for future adjustments. I was fortunate that I did not need to tap my portfolio before that age, between my pension, some part time work and then drawing on my ex-husband’s SS at FRA I was able to leave it to grow. Of course, if you need the money to meet basic expenses, no calculation is required.
Thanks Dave for this discussion.
I know that it’s wise to retire with more than enough income. It’s pretty for sure costs will rise as time passes. I live in Denver and the big thing on peoples minds is that the property taxes will be rising dramatically.
I’m happy I’ve got way more than I need, at this time that is.
Getting the max from S.S. at age 70, for me was a great decision. Now, the COLA is locked in on that higher rate which is a satisfying thought.
Like my doctor said when I asked him about what I could do for prostate cancer…’let’s not over think this.’ I don’t worry about if I did a good thing in waiting. I just enjoy not thinking about the cost of anything in a store.
It’s mind over matter…..if I don’t mind, it doesn’t matter.
Great article David, another perspective to consider.
We’re fortunate, my wife and I are diligent savers & investors, and both have retirement annuities with a cost-of-living adjustment (COLA) feature, which should cover our future needs. My wife is eligible for SS, so I did an analysis, looking at it from an investment perspective as to whether she should take it at ages 62, 67 or 70. SS provides a monthly benefit estimates for these 3 ages.
I assumed her monthly benefits (reduced by our tax rate) would be directly invested in a Total Stock Market Index ETF and assumed a 5% annual return. I also assumed the SS benefits would increase annually by a 1.5% COLA. The results are as follows: Starting the benefit at age 67 instead of 62, the break-even age would be 92. Starting at 70, the break-even age would be 93. I also reduced the annual return to 3.8%, to account for a lower return and/or for taxes paid on the investment income. At 67 and 70, the break-even age would be 87 and 89,respectively. Obviously the assumptions have a big impact on the results.
Other considerations in taking the benefit sooner are our joint income will increase which has the potential to increase my Medicare income related monthly adjustment amount (IRMAA) and hers at a later date. By delaying the benefit, the increased income will be received as we start taking IRA RMDs and as our tax deferred I-bonds mature.
So what will we do? At this point she’s inclined to start the benefit at 62. But due to the complexity, many moving parts and unknowns (future income, investment returns, tax rates and longevity), basing a decision purely on an analysis is difficult. Fortunately, our quality of life doesn’t depend on getting this decision exactly right for the highest lifetime payout. Maybe she’ll just flip a coin, but how may flips?
Thanks for commenting. I’d encourage you to read this section of HD’s money guide:
https://humbledollar.com/money-guide/breaking-even-on-social-security/
In terms of tax minimization, you may find the better strategy is to use your 60s to do Roth conversions, while delaying Social Security until age 70.
Despite not knowing how long I will live and how well my investments will perform while I’m in my 60’s, I feel more comfortable spending and enjoying a little larger portion of my retirement savings now knowing that I should be OK with if my nest egg isn’t as large as I had expected it to be at age 70 with a heftier social security income stream. The author is correct, it’s insurance so if you can afford to wait and you have no health issues that put your longevity into question, then waiting is a smart option.
As someone once said “If I made the wrong decision by waiting to claim my SS until I turn 70, I won’t live long enough to regret that decision”.
I retired at 62. I did have a pension and 401k. I have just hit FRA,(66 4 months) and received my first check. I kept going back and forth on this one. My old analogy kicked in, when in doubt go halfway (62-70) so FRA at 66 and 4 months for me. I also feel comfortable my wife (if I pass before her) will receive a decent amount.
One of my SS spreadsheets looked at what would be my estimated net worth at age 95 if I took my SS at 70 or FRA. Amazingly the number came out about the same. I’m sure this may not be the case for everyone, but it was one of the reasons for me to go for FRA. I’ll also note that I do not feel the need to convert ALL of my T-IRA into a ROTH. I’m comfortable having a balance approach between my brokerage, T-IRA and ROTH accounts.
Same here – after all the spreadsheets, sensitivity scenarios, etc., the difference in Net Worth was negligible – defined as not enough to have altered either our own interim spending or our heirs future inheritances. Result: we claimed at FRA. Of course, everyone’s mileage may vary.
FRA seems to be the sweet spot unless other significant factors (younger spouse w/o SS). In my case, when I compare the benefit increase year over year from 62 to 70, there is a significant dip before/after FRA, the increase in benefits are not consistent. The last year is huge. Are others seeing this?
Absolutely correct, if your spouse is 10 or more years younger than you your RMDs are lower. Delaying to 70 is a personal choice; however, your spouse will receive a larger check if you were the major earner in the family.
Any financial RIA or advisor worth their salt would recommend you wait as long as possible before taking SS checks. I don’t buy into the take SS at 62 argument; but that’s just me. It’s a personal decision you will have to live with the rest of your natural life.
A most excellent article. I’ve just turned 62, am mulling over the decision, and found the article and discussion below very helpful.
I have been eligible to claim Social Security for more than three years now. I have approached the decision on when to claim similarly to the decision I had to make on when to claim my defined contribution pension.
I was eligible to claim my pension at 50, but since I was guaranteed to receive a 5 percent return if I did not claim until 65 when I would receive no further deposits into the fund from my employer.
Since I have sufficient funds in my IRA I am waiting until 70 to get the guaranteed 8 percent return from the government. I look at both of these income sources as an annuity, one with annual cost of living adjustments.
Since I am married there is my wife’s life expectancy to consider as well. Her mother turned 101 on Christmas Day last year and is healthy and as sharp as a tack. My mother in law’s aunt lived to be 104 1/2 so my wife’s expected longevity is a huge factor on my claiming decisions.
This is why my pension was taken as a 100% survivor policy, and I’m claiming at SS at 70. I don’t have nearly the longevity history in my family, but I’m pretty sure my wife will receive significantly more income in her lifetime from these decisions then the money I contributed.
that’s my situation too – the women in my wife’s family tend to live into their 100s. Also she worked a part-time job for decades while our children were young, so her SS benefits will be smaller. I’m planning for 70 to maximize the income for her when I’m gone.. this is predicated on me staying employed though, which is uncertain.
I’m glad you brought your situation up, as married folks have the survivorship issue to think about, particularly when one spouse earned more than the other. Many thoguhtful analyses suggest that if the couple can afford to wait, as you plan to do (for the reasons you state), delaying the claiming date of the high earner at least will leave the surviviing spouse in a better financial position in the future.
That makes perfect sense for your situation. Like I have always said, I have never met anyone that regretted taking SS at 70 or FRA or 62.
There is a simple way to figure out the deal. I paid $132,743 in Social Security taxes my entire working life of over fifty years. In 2023 my wife and I receive combined $57,195 (thanks to COLAs) per year based on those taxes – plus employer taxes. We have been collecting for almost 15 years.
Breakeven for us was many years ago, including employer-paid taxes. And that’s true for most people, which of course is why the SS system needs changes to be sustainable to pay all promised benefits.
Dick, why ignore the time value of money over those 50 years of paying into SS? Yes, SS funds were not invested in the market or a portfolio of stocks and bonds. But time value of money principles still apply to anything but a simple “money in vs. money out” breakeven analysis, right?
Assume you made equal contributions into SS over each one of your 50 years in the labor market. (Yes, this is unlikely since you likely earned higher wages in latter years, and were probably taxed on an increasingly higher amount of your income in latter years– but I don’t have any way of making a different assumption.) Applying an IRR of 8%, your SS contributions would be worth over $1.5 million by year 50, and over $3 million including the SS taxes paid by your employers.
From my perspective, this analysis is a more supportable method of analyzing “breakeven” — whether one received more than, or less than the equivalent value of their and their employer’s SS contributions over their working life.
David, I trail behind your birthday by about a year and a half. I look forward to the first SS milestone, though I don’t expect to take advantage of it, much like the 59 1/2 we passed a short while ago. I’m thankful there is still work for us to do. Thanks for the interesting look at the question.
Bingo. You wrote one of the most informative Social Security articles on HumbleDollar. I decided to take my SS when I reach my FRA and the reason is what you have stated. I spent so much time doing analysis on when it would be best for me that my head was spinning. I’m very comfortable with my FRA decision. (which is 9 months away) I have no worries and sleep well.
Great article. I like the way you differentiate in your thought process between investment/insurance and things you can/can’t control. Very helpful.
Income stream is exactly the way to look at SS and starting that stream should reflect the need for the income and nothing else. That need dictates when to begin collecting.
As you mention, determining that need must include consideration of other streams of income.
The game of maximizing total benefits received in a lifetime or worrying about the crossover point makes no sense.
I agree with you and the author that the decision about when to start SS “should reflect the need for the income and nothing else” and “that need must include consideration of other steams of income” (pensions, rental income, annuities etc.). But in addition to “streams of income” I think in many cases it makes sense to cash in some of your savings if you need the money to fund your living expenses during the 62–70-year-old period so that you can delay taking SS. In effect you would be trading some of your investments for a larger, inflation-protected payment for life.
Many people feel that way and that may be the correct approach, but I still have reservations. What is the cost of depleting retirement funds before necessary, What are the lost earnings on those funds if they had not been touched? What is the risk of not reaching age 70 or much longer? Would it be better to take SS at FRA and if the funds are not needed invest them thereby accumulated a pool of money until the SS payments are used and still have the investments and earnings?
I don’t claim to have the answers, but I kind of like the bird in the hand approach.
To me, it goes back to the idea of thinking of SS as insurance, specifically longevity insurance, rather than thinking of it as an investment. I am “buying” (by using up some of my savings) insurance to help me insure against the possibility of outliving my financial resources. Sure, I might die at age 69 before I receive any SS payments. This would make it a bad investment for my heirs (I spent my own money to delay SS and got nothing for it), but that does not necessarily a bad decision for me. I may live until 100 (fingers crossed), and if I do, I will receive the larger SS payments for 30 years. You could of course take the money you use to delay SS and instead invest it. But I think you would have to take a lot of investment risk and have a lot of luck to create a guaranteed income stream for 25 or 30 years (if it turns out you live that long) that would equal the benefits of delaying SS until age 70.
Great article and seems a sane way to approach this important decision. It is a formula for insanity trying to optimize. I must admit I am concerned about means testing, additional ss taxes etc so i applied in the middle 64. Love the checks, I invest some I treasuries and never looked back.